Can the US Government Regulate Bitcoin and Other Cryptocurrencies?

If you haven’t heard of Bitcoin by now, you haven’t been paying attention. Bitcoin and other cryptocurrencies such as Litecoin, Ethereum, and Ripple have dominated headlines for the past six months. Cryptocurrencies are digital assets designed to work as a medium of exchange that uses cryptography to secure its transactions, to control the creation of additional units, and to verify the transfer of assets. What does that mean? Basically, it is a computer generated asset that is capable of being bought and sold. There is a finite number of Bitcoins, which creates demand, and therefore creates value for the crypto-asset. The Blockchain is what secures the cryptocurrency. Blockchain technology is a public ledger that tracks Bitcoin transactions. Every second, millions of people are buying and selling Bitcoin. Every transaction has a specific transaction code and is part of the Bitcoin Blockchain. This procedure creates a record of authenticity that is verifiable by a user community, increasing transparency and reducing fraud. This is where miners come in.

Bitcoin miners utilize highly-advanced supercomputers, much greater than your common PC, to “mine” for Bitcoins. However, this characterization is a tad deceiving. Miners do not find Bitcoins on the internet, rather, the miners are tracing the Blockchain transactions, and once the transactions reach a certain threshold, and the miners complete a “block,” they are rewarded in, you guessed it, Bitcoins. Bitcoins are thus a form of currency that is capable of being used to purchase goods and services on the internet. While this is a simplistic explanation for how Bitcoin operates, it is helpful to understand that this entire process is completely free from governmental intervention. Therefore, there is currently no recourse for any person that is cheated out of a transaction using Bitcoin.

Opponents of regulation argue that the Blockchain the cryptocurrency is built upon ensures greater security than normal transactions and does not require governmental interference. Moreover, they argue that Bitcoin is premised on being a global currency, capable of being bought and sold from anywhere with an internet connection. This flexibility has a great impact on those who move from poorer countries to developed countries and send money back home, known as remittances. Cryptocurrencies generally have a lower transfer rate than money transfer institutions like Western Union. Proponents of regulation argue that there are no procedures in place to prevent owners of Bitcoin from purchasing illegal items over the internet such as firearms, drugs, and other contraband. The pro-regulation camp is also concerned about the lack of oversight for businesses that use Bitcoins for laundering money, evading taxes, and sponsoring terrorism.

Currently, there are no regulations in place as to how one can use their Bitcoins to buy and sell goods. There are also no regulations regarding how the cryptocurrency is traded. House Republicans have discussed a bill that would limit the scope of what Bitcoin owners could use their cryptocurrency for. The driving motivation behind the bill is to close loopholes for sponsoring terrorism and reduce instances of money laundering and tax evasion.

According to the IRS, Bitcoin must be treated as property for tax purposes. That means a capital gain or loss should be recorded as if it were an exchange involving property. It should be treated like inventory if it is held for resale, and therefore an ordinary gain or loss recorded. If it is used as payment, it should be treated like currency but must be converted, and its fair market value checked on an exchange.

Rep. Jared Polis, D-Colo., and Rep. David Schweikert, R-Ariz., co-chairs of the Congressional Blockchain Caucus, introduced the Cryptocurrency Tax Fairness Act on September 7, 2017. According to Representative Polis’ website, the bipartisan legislation creates a structure for taxing purchases made with cryptocurrency. Similar to foreign currency transactions, it allows consumers to make small purchases with cryptocurrency up to $600 without burdensome reporting requirements. “Cryptocurrencies can be used for anything from buying a cup of coffee to paying for a car, to crowdfunding a new startup and more and more consumers are choosing to use this type of payment. To keep up with modern technology, we need to remove outdated restrictions on cryptocurrencies, like Bitcoin, and other methods of digital payment,” said Polis. “By cutting red tape and eliminating onerous reporting requirements, it will allow cryptocurrencies to further benefit consumers and help create good jobs.”

Moreover, the act “would treat cryptocurrencies similarly to how foreign currency is now treated and relieve users from having to keep track of small personal transactions. Not only will this create a level playing field for digital currencies, it will also help unleash innovation on applications like micropayments, which can consist of dozens of transactions per minute and thus are difficult to square with the current law,” according to Jerry Brito, Executive Director of cryptocurrency think tank Coin Center.

The extent of which the federal government can regulate cryptocurrencies remains to be seen. The decentralized nature of the Bitcoin Blockchain increases this uncertainty insomuch as that it has no one central authority. Regulations of cryptocurrency may come in near future as to how they are treated for tax purposes. Full blown SEC guidelines and regulations of cryptocurrencies seem more distant.

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